Morphogenesis of the hair follicle is driven by inductive interactions involving signals emanating from the developing epidermis and underlying dermis, but the molecular nature of these signals has not been identified. Our preliminary studies suggest that interaction between Sonic hedgehog (Shh) expressed in the epithelium and fibroblast growth factor 10 (Fgf-10) expressed in the mesenchyme may play a critical role during early follicle morphogenesis. The secreted molecule encoded by the Shh gene has recently emerged as a key signal in patterning during vertebrate development. Our genetic analysis of Shh null mutant suggests that hair follicle development is arrested at the hair germ stage and that epidermal development is enhanced. Throughout the initial stages of follicle formation, Shh is specifically expressed in the epithelial cells in close contact with the underlying mesenchyme, suggesting a direct role in induction and differentiation of the mesenchyme. Fgf10, the only member in the Fgf gene family found to be selectively expressed in the mesenchyme during early follicle morphogenesis, lead us to propose that Fgfl0 may play an instructive role in inducing the follicle. The objective of this research is to understand the role of Shh during early skin morphogenesis and to test a candidate mesenchymal signal for induction of epithelial differentiation. We will generate Shh conditional mutant in the skin to determine basal cell fates, and transgenic misexpressing Fgf10 in the basal cells to study Fgf10 function during hair follicle morphogenesis. The results obtained from the proposed studies will be useful for future genetic and biochemical endeavors and may provide insights into the potential use of Shh and Fgf10 as therapeutic proteins to treat baldness related diseases.